Yves here. To this useful post, I wanted to add a comment from Clive about one of the favorite deficit scaremonger arguments, which he recently debunked in comments:
I wish I had a pound for each time I heard an asset holder (it is usually someone discussing a retirement fund but you can easily find a similar response from someone exposed to residential real estate) defending some perfectly idiotic policy response on the basis that it would “help their pension”. I wish it, because if I had, I’d probably have enough to bail out the entire system.
It cannot be stated often enough (please everyone, tell your friends as often as they’ll put up with it): All pensions are residual claims on future prosperity. Wrecking the present, such as:
* by degrading the installed asset base in areas like transport, power or potable water supply and distribution
* by neglecting health and social care services
* by crapifying education
* by tolerating unemployment, especially youth unemployment
… is lowering the baseline for prosperity in the present which means a lower base to draw on in the future. These are not potential, theoretical problems which might emerge in the future; they are happening today. They represent legitimate areas where state intervention is perfectly justified.
I am not a disinterested party here. I am long on both financial asset and residential real estate exposure. These are judged by the people who manage my fund the least-worst asset classes for long-term investment — I have limited (virtually zero) influence over their strategies for investment. I fully expect these assets to be subject to write downs with the knock-on effect to the returns I have been promised in retirement. Not exactly a prospect that thrills me, especially as I have limited options to reduce my exposure. But the alternative to the current approach — which is being pursued by every government and central bank out there — and writing down unsustainable valuations is as the piece points out The Great Depression II.
While deficit terrorism precludes state action which would limit the damage, the persistence of policies which make a sudden stop (disorderly defaults and massive dislocations) far more likely is enabled. In short, it gets worse the longer it goes on for.
I continue to wait for sanity to arrive, but I’m not exactly holding my breath.
By Thornton (Tip) Parker. Originally published at New Economic Perspectives
Most MMT advocates probably took months to get comfortable with it. But like a personal computer, one need not understand its innards to use its power. The great power of MMT is its lesson that the federal government can create new dollars by running deficits to do things that should be done. But the lesson is counterintuitive and will be rejected by voters unless it can be explained convincingly in a few minutes. This paper offers five nuggets for explaining it quickly. NEP readers are asked to suggest ways to make the explanation simpler and better.
* * * * *
Most Americans believe the federal government is like a family or business that must live within its income. On the surface, that makes sense and the reasons why it is wrong are complex. Here are five nuggets, or simple ways to explain why it is wrong to voters who will never be economists. They show why federal deficits are necessary. They can be adapted and used as appropriate.
Federal deficits are necessary and the government normally runs them. It ran them during 129 of the past 200 years or nearly two thirds of the time. During the other third, it ran surpluses to reduce its debt during five periods of six or more years. Each period led to a major depression.
1823-1836: Federal debt reduced 99% – depression began 1837.
1852-1857: ” ” ” 59% – ” ” 1857.
1867-1873: ” ” ” 27% – ” ” 1873.
1880-1893: ” ” ” 57% – ” ” 1893.
1920-1930: ” ” ” 36% – ” ” 1929.
The government had to run deficits to recover from each depression.
The Federal government is different
The economy needs a continuing influx of new dollars to grow. The government creates new dollars when it runs deficits by spending more than it receives from taxes.
When the government collects taxes it takes dollars out of the economy. It also appears to take dollars from the economy when it sells bonds. But unlike taxpayers who lose their purchasing power, bond buyers get bonds and keep their purchasing power. The deficit spending adds new dollars to the economy as if they had been “printed”. Note these key points:
- Unlike reluctant taxpayers, bond buyers want the bonds to use as savings accounts to safeguard their dollars and earn interest.
- The government redeems the bonds when they come due, but it can roll over or sell replacements indefinitely.
- The total of all dollars the federal government has created this way since 1790 is called the federal debt which never has to be repaid while the nation exists. Attempts to reduce the debt significantly never worked because they took dollars from the economy that it needs to operate and grow.
- Because the government can create dollars, it can never run out of them and cannot be forced into bankruptcy.
- The federal government is not like families or companies because only it creates new dollars that stay in the economy unless it removes them by running surpluses.
This explanation is generally correct, but the details of how the government creates new dollars are more complicated.
Economic Sectoral Balances
Most people have heard of the private sector but they don’t know what “sector” means. The economy has three major parts called the private sector, the public sector, and the foreign sector. The total dollar flows from all buying and selling within and among the sectors always cancel out or add up to zero. A sector has a deficit if it spends more than its income. When this happens, one or both of the other sectors must run a corresponding surplus, and vice versa.
Since the 1970s, the private sector has bought more goods and services from other countries than it sold to them. The dollars that flowed to other countries to pay for the net imports were foreign sector surpluses and private sector deficits.
Those deficits drained dollars from the private sector and the economy might have slowed down or even fallen into a depression for a lack of money. That did not happen because the federal government in the public sector ran deficits that replaced the dollars sent abroad. The country now imports about one half a trillion dollars worth of goods and services a year more than its exports. That flow will have to be reduced eventually or the economy will become weaker and even more unbalanced. But until that happens, the government is trapped into running deficits to compensate for the private sector’s failure to earn its living in relation to the foreign sector. Balanced federal budgets are formulas for economic decline.
Drive the Economy
The economy is like a car. Government spending is the accelerator. Taxes are the brakes. To keep going or speed up, press the accelerator. To slow down, ease off the accelerator or press the brakes. Driving too fast could lead to hyper-inflation, but that never happened here because the country always slowed down in time.
Reverse the Discussion
Those who oppose federal deficits should be made to answer two basic questions:
- Why should the government avoid spending to meet the country’s critical needs in order to save dollars which it can create?
- How could the government ever run out of dollars since it can create them by running deficits?
There are no good answers to those questions.